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‘S2P is standing in the way of equality’

Retention of the second state pension is a major sticking point in the Government’s Pensions White Paper proposals and will mean continued inequality between high and low-earners, according to the Pensions Policy Institute.

In its response to consultation on the White Paper, the PPI says that measures such as reducing the number of qualifying years for the basic state pension would help to provide greater equality between men and women.

But it says the plans fail to address inequality between high and low-earners, primarily because of the retention of the state second pension.

Although the White Paper includes plans to introduce a flat-rate second state pension, the PPI says the flattening is too slow and will do little to help current pensioners. It also says that many people will have gaps in their contributions to S2P and so will receive less than the full amount of S2P.

The PPI warns that women, in particular, will continue to fail to qualify for full S2P as there has not been a reduction in the number of years required to qualify for it. Individuals will still need between 49 and 52 years of contributions to qualify for the maximum level.

The submission criticises the Government for failing to set a target for the reduction in people undersaving. It suggests that success could be measured by reference to an adequacy of retirement income against an income target measure, using estimates of the number of people undersaving.

Although the PPI states that auto-enrolment into private pension provisions should lead to an increase in the number of people saving for their retirement, it argues the White Paper sets unrealistically optimistic expectations for what pers- onal accounts can achieve.

This is because the complexity of means-testing and the state pension system means that it may not be possible for the FSA to give clear generic advice on the value of saving into personal accounts.

It says factors not addressed by auto-enrolment such as affordability may prevent pension saving and personal accounts may have an adverse effect on existing pension saving through levelling down.

The PPI says the level of charges should not be viewed as the decisive factor in choosing between alternative models.

It says: “The impact of investment returns and the employer contribution and the potential impact of pension credit could be more significant for pension income from a personal account than the impact of a very low, rather than low, charge.”


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